Accurate payment and transfer of salary towards employees that to on time is not only highly important but also the law. As the expenses incurred with payroll is the biggest expenditure that a company bears, it is imperative for the employer to remain vigilant in keeping an eye on all the transactions. Keeping this mind, below the employer or the payroll user will find details regarding calculation of payroll that will include wages, taxes and also benefits.
What is Payroll and How Does it Work
Payroll is that process which calculates the Payroll Expenses on the basis of two basic aspects which are responsibility of the employer.
The first aspect is total of expenditure incurred towards the employees, which in essence are broken down in falling parts:
This is basic terms is the salary decided upon between employer and the employee. Different employees are paid differently on the basis of the contract of employment, employers, fee structures as well as the type of business. The most common wage structure is created on the basis of salaried and hourly.
Suppose the employee is in sales team, the employee might get benefited with incentives and commission added to the wages. Another part of employee’s remuneration is called bonus, which might be transferred annually due to recognition of the employee’s work or promised as part of hiring package. It is one of the most important basis for the calculation of tax for both employee and by large the company as well.
This part is paid to the employees by the employer himself, if he chooses to offer employee benefits. At times most employers decide to pay portion of certain expenses for the employee as part of benefit package. Another way of offering benefit is by reducing the cost of certain benefit from gross wages of the employees.
Some of the most common benefits offered are:
- Dental or Vision Insurance
- Health Insurance
- Life Insurance
Some of the common benefits for deduction voluntarily offered to employees include:
- Adjustable Spending Account
- Spending Account for Healthcare
- Day Care for Children
- Contribution towards Retirement (Percentage same for 401(K) or 403(B))
The benefits listed above are generally also paid in some amount by the employee as well which is taken from the pre-tax income amount that goes towards payment of expenses for the whole calendar year. The employer is not bound to contribute towards these reductions; however it is imperative for the employer to keep track of these deductions in order to calculate the taxes later on correctly.
Furthermore, if the employer accords employees with sick leaves and paid leaves, the employer will have to somehow count them and add it to deductions correctly. Most of the time paid and sick leaves are calculated as per the salary of a day, thus the employer needs to keep track of how many paid and sick leaves is taken by the employee in order to ensure no advantage is being taken for this benefit.
3. Social Security, Unemployment and Medicare Taxes
Taxes can be for State, local Tax or federal as per the jurisdiction under which the company comes under. For the process of payroll, generally only Medicare and Social Security contributions are countedThe second aspect is deduction of correct amount of annual income tax from the wages of the employee which is actually called Employee’s Income Tax Deduction from the view point of the employer and company owner. This part is illustrated below in full detail:
4. Income Tax Deductions
It is the responsibility of the employer to calculate and send the gross of the employees’ wages correctly under the laws of both State and Federal taxes along with the consequent amount of tax. Once the tax amount is reduced, it is again the obligation of the owner to process that money forward to specific government agency.
- First and foremost, the employer needs to get hold of the employee’s allowances withheld, which can be processed through a form called Form W-4. This amount is a small portion that is exempted on yearly basis from the employee’s salary. In the year 2014, amount of $3,950 was exempted as allowance from withholding from the salary of the employees. In most cases, employees either opt for 1 allowance or 0.
- In cases wherein the employees opt for 0 allowances, the employer tends to withhold more income tax for Federal from their paycheck or salary. This is the reason many employees prefer to go for 0 allowances as on getting refund, the amount received will be much larger.
- Once the process of allowances is complete, withholding of income tax for federal is calculated through various different methods of which many are mentioned in IRS Publication 15. This amount of Federal Income Tax is usually send together with payments made for Social Security and Medicare and thus are usually reported in IRS Form 941 also.
- Income Taxes for state are also come down to through same method and some of them also accord an equivalent form of W-4. For further information and details regarding the calculated amount and frequency of the same, the employer should locate their State’s labor as well as employment office
5. Calculating Payroll
Considering the imperativeness of properly calculated payroll in order to transfer the correct amount of salary to the employees along with streamlining the required tax payment, it is the need of the hour to remain as authentic and straight as possible.
To do so following methods can be utilized:
- Calculate the payroll amount by themselves.
- Use payroll solution online or full service software, like QuickBooks payroll, that makes the process smoother and automatic.
- Hiring an accountant, Bookkeeper or an expert in payroll management.
- Most of the online payroll services accord users with comprehensive solution designed keeping the requirement and needs of the business in mind. This method is best suited for small sized business or startups. One such example is Intuit’s Paycheck Calculator. This method is perfect for companies where number of employees range from 1 to 10.
As explained above, it is quite obvious that management of payroll is quite a complex process which is never ending. The process done in the month has to be repeated over and over again. Another thing to keep in mind is the small tasks and intricacies of payroll which if done wrongly can result in huge loss.
In case the user prefers to manage payroll on their own, it is imperative for him to keep an eye out for even small and minute change as that can impact hugely in future. Irrespective of the number of employees being less than 5, the owner should be diligent enough to avoid any and all mistakes.